The Effect of Audit Partner’s Experience on Audit Fees

The purpose of this thesis is to examine the effect of audit partner’s experience on audit fees. Previous audit fee literature has mainly examined audit pricing at audit firm-level. The current study focuses on audit pricing at partner-level. The individual differences in knowledge, risk-tolerance, negotiation skills etc. between experienced and inexperienced auditors may influence audit engagement planning and furthermore, audit pricing. Moreover, a perceived linkage between expertise and experience may result in demand for more experienced auditors in order to enhance audit quality. Big demand increases audit fees. This study focuses on the audit engagements of publicly listed companies. The sample consists of NASDAQ OMX listed firms in Finland and Sweden during 2005-2007. Unlike in several other countries, in Finland and Sweden the responsible auditors are required to personally sign the audit reports on behalf of the audit firm. Therefore, the responsible auditor of each engagement can be identified. This provides the opportunity to examine how the audit partner’s professional characteristics affect audit pricing. The results indicate that experience is positively and significantly associated with audit fees, but only in case of big listed firms. That is, more experienced auditors charge higher audit fees than less experienced auditors. Experienced auditor’s developed negotiation skills and information assessment might affect his / her engagement planning and audit pricing decisions in a way that increases planned audit resources and audit fees. However, the association occurs only in the big listed firm sample, whereas there is no association in the small listed firm sample. These findings suggest that the demand of experienced auditor is greater among large listed firms than small listed firms. Big firms traditionally demand higher audit quality, and experience is assumed to reflect expertise and furthermore, quality. Therefore, big firms may be willing to pay higher audit fees in order to receive high quality auditing.